When the Affordable Care Act’s “individual mandate” takes effect in October, millions of Americans will be hard pressed to select the best health insurance coverage for their needs, unless relatively simple design features are incorporated into the state and federal websites they will use to choose a policy. Smart design of those websites, the so-called health insurance exchanges at the heart of Obamacare, could save consumers and the government more than $9 billion annually.

Baker and co-authors caution that the new health exchanges may not be designed in ways that provide consumers with the guidance they need to select the most cost-effective policies.

“While the success of the health exchanges will depend, in part, on the provision of cost-efficient products [by insurance companies], it also will depend, to some extent, on the design of exchanges that will allow consumers to identify them and to choose plans that are good fit to their needs,” the study authors write.

Are the exchanges being well designed? “Some states are trying very hard to use good choice architecture, but others are overwhelmed,” Baker said. “I have high hope for the federal web portal because we have been providing our research results to the Department of Health and Human Services, and we get the sense that they understand the essential message. My prediction is that it will take a couple of years to learn what works.”

If consumers cannot make informed choices, the researchers note, then the insurance exchanges will not produce competitive pressures on health plan costs, one of the main advantages of the Affordable Care Act’s reliance upon choice and markets. Under the terms of the health care law, states have the option of designing their own exchanges, or using one developed by the federal government.

Based on a Congressional Budget Office estimate that 20 million Americans will purchase insurance through the new exchanges and the magnitude of error measured in the experiments, Baker and his colleagues estimate that unaided choice represents a cost to consumers of $9.12 billion each year. Moreover, since almost all health insurance policies sold through the exchanges will be subsidized by tax credits, websites with good choice architecture would produce substantial savings not only to individual consumers, but to the federal budget and taxpayers, as well.

Baker is the William Maul Measey Professor of Law and Health Sciences at Penn Law. He and his co-authors conducted a series of experiments to see how well or poorly respondents performed when asked to select the best health insurance policy for their needs. Without aids, most participants had difficulty making good choices. The only group that performed reasonably well in the experiments were financially savvy Columbia MBA students.

Consumers face two tasks when choosing insurance. The first is to estimate their expected usage and out-of-pocket expenses for the upcoming year. The second is to select the right plan given their expected usage.

The experiments, which presented a simplified version of the health insurance choice, focused on the second task. Subjects were asked to imagine they were choosing health insurance for a family of three – themselves, a partner, and one child – with an anticipated number of doctor visits and out-of-pocket health care costs over the next year.

Each subject was required to choose one plan from a set of four plans and one from a separate set of eight plans. With four choice options, respondents selected the best option 42 percent of the time. With eight options, they selected the correct option only 21 percent of the time, a result no different from chance. Compounding the problem, the respondents seemed unaware that they were making poor choices.

The MBA students, on the other hand, chose the right option 73 percent of the time.

With a little assistance, outcomes improved dramatically for typical consumers. When provided with “smart” default options that preselected the most cost-effective plan and a cost-calculator, the performance level of ordinary respondents was comparable to those of the MBA students. Average errors costing individual consumers $533 dropped to $77.

“Our results present a bad news/good news story of particular importance,” the authors write. “The bad news: Consumers left to their own devices seem to make large errors when choosing health insurance…..The good news is that we have demonstrated that exchange designers can improve consumers’ performance markedly.”

The paper, co-authored by Baker and Eric J. Johnson of the Columbia Business School, Ran Hassin of Hebrew University, Allison T. Bajger of the Columbia University Dept. of Psychology, and Galen Treuer of the University of Miami, was issued by Penn Law’s Institute for Law and Economics.

Tom Baker, the William Maul Measey Professor of Law and Health Sciences at Penn Law.